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April 17, 2014

Why Are So Many Boomers Working Longer?

Market watchers — or at least those pundits who are required to provide a reason for why the markets go up or down on a given day — love to speculate beforehand on the monthly employment figures, and then react quickly when the Department of Labor releases them. Those pundits, and their audiences, might be better served by looking at longer ranges of data on employment, such as the recently released Labor-force Participation Rates of the Population Ages 55 and Older, 2013, by the Employee Benefit Research Institute.

That report was written by EBRI’s Craig Copeland and considers data from the Census Bureau and the Bureau of Labor Statistics, along with EBRI’s own Retirement Confidence Survey. It concludes that labor force participation rates have increased for older Americans from the 1990s to the present, while the participation rate has fallen for younger Americans. That raises the question of why older Americans are working longer, and whether, as has been surmised, older Americans are “taking” jobs from younger Americans. As Copeland writes, “it appears either that older workers filled the void left by younger workers’ lower participation, or that higher older-worker participation limited the opportunities for younger workers or discouraged them from participating in the labor force.”

Before getting into that issue, some definitions are in order. First, the "labor force participation rate" measures those individuals in a specific age group who are “working or actively pursuing work,” which Copeland points out “is different from the share of those actually working who fall into a specific category.”

Second, let’s define the scope of the issue. Copeland says that the percentage of civilian, noninstitutionalized Americans near or at retirement age (age 55 or older) in the labor force increased from 29.4% in 1993 to 40.3% in 2013. In the report’s summary, Copeland writes:

For those ages 55–64, the upward trend was driven almost exclusively by the increased labor-force participation of women, whereas the male participation rate was flat to declining. However, among those ages 65 or older, the rate increased for both males and females over that period.

This upward trend in labor-force participation by older workers is likely related to workers’ current need for continued access to employment-based health insurance and for more years of earnings to accumulate savings in defined contribution (401(k)-type) plans and/or to pay down debt.

Many Americans also want to work longer, especially those with more education for whom more meaningful jobs are available that can be performed into older ages.

To return to the question of whether older people are "crowding out" younger people from jobs, it’s beyond the scope of the EBRI research to answer, but it turns out it has already been definitively addressed by researchers at Boston College’s Center for Retirement Research. The answer is no.

A 2012 paper by Alicia Munnell and April Yanyuan Wu, Are Aging Baby Boomers Squeezing Young Workers Out of Jobs?, is a serious academic work, discussing the “lump of labor” theory (the original "crowding out" theory from the mid-19th century), reviewing and analyzing the data, testing the theory, including a separate test “for the Great Recession” and exploring the "causal relationship between the labor force activity of the old and the young.” The conclusion?

“This horse has been beaten to death. An exhaustive search found no evidence to support the lump of labor theory in the United States. In fact, the evidence suggests that greater employment of older persons leads to better outcomes for the young — reduced unemployement, increased employment and a higher wage.” Moreover, these “patterns are consistent” for both men and women and for groups with different education levels, and were no different during the financial crisis, or Great Recession if you prefer.

So why should you care, as an advisor and/or as a member of this society? First, American workers are “undergoing a significant period of aging that appears likely to continue,” the EBRI paper points out. As evidence, Copeland cites EBRI’s most recent Retirement Confidence Survey (RCS), which found that “a growing percentage of workers expect to retire at later ages both because of the reasons described above [for health insurance, to pay down debt and to save longer for retirement] and/or because of an increased desire to continue to work.”

Older people want to work longer, at least those who enjoy their work, which in turn is directly correlated to how much education a worker has. “Overall, as workers’ educational attainment increased, their labor-force participation rate also increased,” Copeland reports. For example, in 2012, “60.7% of individuals with a graduate or professional degree were in the labor force, compared with 23.9% of those without a high school diploma.”

So that’s the entire labor force. What about older people and education? How did the financial crisis affect these workers?

“The recent economic downturn did not alter the trend of older workers in the labor force,” writes Copeland, “rather, it appears that this remained the trend, as more opportunities for older workers exist that correspond to their increased educational attainment. In fact, the increase in the percentage of those 55 or older in the labor force increased with the higher incidence of more highly educated people in this age group.”

So baby boomers, who are more highly educated than previous generations, are working longer. Millennials — those age 25 to 32 — are the most highly educated generation in American history: 34% have at least a bachelor’s degree.

Let’s compare boomers with millennials. A Feb. 2014 survey by Pew Research found that way back in 1979, “when the first wave of baby boomers were the same age that millennials are today,” the typical high school graduate earned about three-quarters (77%) of what a college graduate made. “Today, millennials with only a high school diploma earn 62% of what the typical college graduate earns.” That same study compared educational levels of prior generations at the same age as millennials: only 13% of 25- to 32-year-olds in 1965 had a college degree; of the ‘early’ boomers who were age 25 to 32 in 1979, 24% held college degrees.

However, actual worker earnings have stayed nearly flat for each cohort of 25- to 32-year-olds since 1965: from $30,892 in 1965 to $35,000 in 2012 (in 2012 dollars).

So here’s where we stand. The boomer clients you have now are more likely to work longer, for a number of reasons but buttressed by the fact that they like to work (sound familiar, advisors?), which is positively correlated to being better educated.

The generations that follow the boomers will be even better educated, and so are more likely to work even longer and for the same reasons. One big caveat: the Affordable Care Act may make it less necessary for older workers to be employed merely for the health insurance they want and need. So we’ll have to see how that will play out.

But maybe Social Security is a little healthier than we thought. If you continue to work into older age, you’ll still be paying your Social Security taxes (as will your employer, of course); and you’ll be paying income tax if you take Social Security benefits while you’re still working, depending on your total income.

Yes, not everyone is able to work due to health issues as they age, but higher longevity added to more educated people working longer will be a net benefit to the Social Security system and to society. And remember, old people are not keeping young people down, at least when it comes to jobs.